New Chinese Counterespionage Law Aimed at US Tech Sector – BankInfoSecurity.com

China on July 1 set into motion a revamped Counter-Espionage Law that seeks to protect national security agencies and documents, data, and materials related to national security from foreign adversaries. The measure gives Chinese authorities sweeping powers to investigate and even seize property of companies doing business in China.

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China’s National People’s Congress first passed the Counter-Espionage Law in November 2014, signaling the Chinese Communist Party’s intent to safeguard state secrets the party designated as critical to national security, giving security agencies the power to take proactive action against suspected espionage activities.

The revised law, passed by the National People’s Congress Standing Committee on April 26, went into effect on Saturday and covers all forms of cyberattacks that target government bodies and China’s information infrastructure.

The revised law grants “state security organs,” the armed forces, the CCP and public institutions the power to proactively respond to all forms of network attacks, attacks on critical information infrastructure, and those that aim to obstruct, control or disrupt government functions. It also gives the government power to take legal action against foreign institutions suspected of carrying out espionage activities.

“Acts of espionage endangering the PRC’s national security that are carried out, instigated or funded by foreign institutions, organizations or individuals, or that are carried out by domestic institutions, organizations or individuals colluding with foreign institutions, organizations or individuals must be legally pursued,” it reads.

The revised law also gives agencies the power to “inspect the electronic equipment, facilities and related programs and tools of relevant individuals and organizations,” and seal or seize property if the entity under investigation fails to employ immediate corrective measures.

US Businesses Face Growing Uncertainty

Even before the revised law took effect, Chinese authorities had raided the Chinese offices of consulting firm Capvision and U.S. firms Bain & Company and the Mintz Group, detaining several employees. U.S. Chamber of Commerce President and CEO Suzanne Clark said the revised law and China’s raids on Western due diligence and consulting firms “ratcheted up risk and uncertainty in the market.”

Clark said China’s recent policy tools and practices are like economic coercion, extreme forms of digital protectionism and military-civil fusion, and they have made the world less secure. Clark hinted at pursuing supply chain alternatives in other countries. “Make no mistake, national security must come first – but it doesn’t have to come at the expense of our economic future,” she warned.

Billionaire investor Mark Mobius, who in March struggled to withdraw funds from China, told Fox Business that doing business in China is becoming increasingly problematic. “China also is trying to attract American companies to come into China, and of course, they will try to get information from these companies as much as they can. So it’s a real dilemma,” he said.

China’s increasing protectionist measures have the potential to deter foreign investment. The Cyberspace Administration of China in May banned sales of U.S. chipmaker Micron’s products following a cybersecurity review that revealed “relatively serious security issues” (see: China Bans Micron Chip Sales).

“Beijing intends to strengthen its grip over information in Chinese territory and uses the lucrative Chinese market to play its cards right,” said Sameer Patil, senior fellow at New Delhi-based policy think tank Observer Research Foundation. “Beijing wants foreign businesses to operate in China but the stability and continuity of the Chinese Communist Party is its foremost national security objective.”

Patil said Beijing defines national security based on its objectives, but this creates a gray area for foreign businesses as they may not know which action of theirs could trigger the CCP to action. China’s counterespionage actions could affect the data security of technology companies the most, depending on the nature of the data that authorities intend to access.

China’s Tech Dominance at Stake

Patil said that China wants to encourage the domestic technology ecosystem, surge ahead of the United States in technological dominance and deploy executive action to ring-fence its technology sector from potential espionage efforts, similar to how it implemented its own web firewall.

Kaushal Chandel, assistant professor at the New Delhi-based Jawaharlal Nehru University Center for Chinese and South East Asian Studies, said China’s law is another indication of the regime’s growing assertiveness. China is willing to send out the message that it can prosecute any foreign company in response to U.S.-led economic or technology sanctions.

Chandel said the new law could also be the party’s way to tackle rising discontent among Chinese citizens. “A significant percentage of citizens were not happy with [Xi] Jinping becoming the chairman of the CCP for the third time, and recent economic woes and the government’s alleged mismanagement of the COVID-19 pandemic added to their discontentment,” Chandel said. “The new law could let the government crack down on people who may create disturbances or agitate against the CCP. The regime’s security is of upmost importance to the government,” he said.

But China’s options may be limited. Patil said the CCP’s aggressive posture may placate the domestic audience, but if there is no prosperity, it may dent the legitimacy of the party. “China may be forced to selectively apply provisions of the law to ensure foreign technology companies are not driven out of the market. It needs to take corrective measures to ensure that tech investors continue to invest and the economy grows.”

Amit Bhandari, senior fellow at Mumbai-based public policy think-tank Gateway House, said the growing economic and geopolitical U.S.-China rivalry will continue to affect companies doing business in China, and businesses will have to create a separation between their Chinese and non-Chinese arms to avoid sanctions or scrutiny.

Bhandari cited the example of U.S. venture capital giant Sequoia Capital splitting off its Chinese division in June after U.S. President Joe Biden signaled the government’s intent to prescreen U.S. investments in China’s artificial intelligence and semiconductor sectors.

“Foreign governments are beginning to realize that there is no real separation between the Chinese government and Chinese private companies. The U.S. and Canada recently took steps to prevent the acquisition of domestic companies by Chinese enterprises and investigate investments in Chinese businesses,” he said. “Businesses operating in China face the possibility of reciprocal action from China.”